Ralph C. Derbyshire

Senior Vice President and

Deputy General Counsel

FMR LLC Legal Department

Mail: 200 Seaport Blvd., V7A Boston, MA 02210

Office: 245 Summer Street, Boston, MA 02210

Phone: 617-563-0296 Fax: 508-357-8568

Ralph.Derbyshire@fmr.com 

SUBMITTED ELECTRONICALLY

September 24, 2015

Office of Regulations and Interpretations

Employee Benefits Security Administration

U.S. Department of Labor

Attention: Conflict of Interest Rule, Room N-5655

200 Constitution Avenue, NW

Washington, D.C. 20210

Office of Exemption Determinations

Employee Benefits Security Administration

U.S. Department of Labor

Attention: D-11712 and D-11713

200 Constitution Avenue, NW

Suite 400

Washington, D.C. 20210

Re: Definition of the Term Fiduciary: Conflict of Interest Rule (RIN 1210-AB32); Proposed 

Best Interest Contract Exemption and Principal Transactions in Debt Securities 

Exemption (ZRIN: 1210-ZA25)

Ladies and Gentlemen:

Fidelity Investments (“Fidelity”) appreciates the opportunity to provide supplemental 

comments on the proposed rule to broaden the definition of “fiduciary” under ERISA and the Internal 

Revenue Code1 and the accompanying proposed prohibited transaction exemptions (collectively, the 

“Proposed Regulation”). This letter provides comments in response to several questions raised by the 

Department of Labor (“Department”) during its August 10-13 Public Hearings (“Public Hearings”). 

Part I of the letter responds to questions about the “new best interest paradigm” that Fidelity proposes 

in our July 21, 2015 comment letter and explains why this new paradigm would achieve the 

Department’s stated objectives at a far lower cost and with significantly less disruption to the industry 

 1 Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice; Proposed Rule, 80 Fed. 

Reg. 21928 (April 20, 2015).
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and retirement investors.2 Additionally, Attachment A dispels several misconceptions about our new 

best interest paradigm that have been articulated in recent weeks, and Attachment B sets forth the text 

we propose to implement our new best interest paradigm for both the regulation and the BIC 

Exemption. Part II of the letter responds to questions about the cost of complying with the 

Department’s proposal and provides estimated costs for Fidelity to comply with certain aspects of the 

Department’s Proposed Best Interest Contract Exemption (“BIC Exemption”).

3

 

As we stated both in Fidelity’s July 21, 2015 Comment Letter and in our testimony at the 

Public Hearings,

4 we support a best interest standard for investment advice to retirement investors. 

Fidelity acts in the best interest of customers, and we believe that all financial services providers 

should be required to do the same when providing investment advice. Our proposed paradigm is not 

intended to undercut the Department’s best interest commitment. Instead, it is designed to create a 

workable means to implement that commitment – one that would not result in the loss of critical 

guidance for retirement investors. 

I. Fidelity’s Proposal Establishes a Workable Best Interest Standard.

A. Advisors Must Be Allowed To Promote Their Own Services.

As we explained in our July 21, 2015 Comment Letter, one of the central flaws in the 

Department’s proposal is that it would make it impossible for investment advisors to promote their 

own services or to negotiate the scope and conditions of their own engagement. The Proposed 

Regulation defines “investment advice” to include any “recommendation of a person who is also going 

to receive a fee or other compensation for providing” investment advice, which would include the 

recommendation of one’s own services. The rule thus places all advisors – whether fee-based or 

commission-based – in a quandary: How can an advisor promote its own services in a manner that is 

in the customer’s “best interest”? Would acting in the customer’s best interest require the advisor to 

charge the lowest possible fee to all customers? Would the advisor be required to refer investors to its 

competitors if they offered lower fees or provided superior service? It is simply not commercially 

viable for an advisor to act in an investor’s best interest when promoting its services or negotiating its 

compensation and the terms of its engagement. 

 2 See Letter from Ralph Derbyshire, Senior Vice President & Deputy General Counsel, FMR LLC Legal Department, to 

Office of Regulations and Interpretations, Employee Benefits Security Administration, (July 21, 2015) available at: 

http://www.dol.gov/ebsa/pdf/1210-AB32-2-00658.pdf (“July 21, 2015 Comment Letter”).

3 Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21960 (April 20, 2015) available at: 

http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28202.

4 Fidelity’s testimony is available at: Conflicts of Interest Proposed Rule, Related Exemptions and Regulatory impact 

Analysis Hearing, August 11, 2015, Panel 11 available at: https://www.youtube.com/watch?v=LFhZXbRWzY&index=23&list=PL6F71CF53337F836B and available at: http://www.dol.gov/ebsa/pdf/1210-AB32-2-

HearingTranscript2.pdf at 540:13. 
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Our new best interest paradigm resolves this problem by doing what is normally done in other 

fiduciary contexts: clearly distinguishing selling activity from advice. Our proposal contemplates that 

an advisor would not be a fiduciary when merely marketing and promoting its services or negotiating 

the terms of its engagement (including negotiations over both the amount of its compensation and the 

scope of the investment advice to be provided). We are not simply advocating for a broader “seller’s 

carve-out” under the rule. Instead, under our new paradigm, once the terms of the engagement are 

established, all investment advice within that framework would be subject to fiduciary standards and 

would have to be made in the investor’s best interest and without regard to the advisor’s compensation. 

Thus, our new paradigm makes it possible for investment advisors to promote their own services, 

while still requiring them to act as a fiduciary once they have been engaged and are providing 

investment advice.

5

There is nothing novel about this dichotomy between selling and advising in the context of a 

fiduciary relationship. To take a familiar example, attorneys have a fiduciary obligation to provide 

legal advice that is in the best interest of their clients. As with investment advice, there may be some 

relationship between the advice offered and the attorney’s compensation. For example, when charging 

an hourly rate it might be in an attorney’s interest to prolong litigation, while the client’s interests

might be better served by settling the lawsuit early. The attorney has a fiduciary obligation to put his 

or her self-interest aside and advise the course of action that is in the best interest of the client, which, 

in this example, might be settlement. The lawyer is not, however, required to set aside his or her own 

interests when negotiating the hourly rate that the client will pay or other terms and conditions of the 

attorney’s engagement. The same reasoning holds for doctors, trustees, and other types of fiduciaries, 

and there is no reason why it cannot or should not hold for investment advisors.

B. Advisors Must Be Allowed To Implement the Best Interest Commitment through a 

Unilateral Contract.

During the Public Hearings, Mr. Hauser requested more specifics about Fidelity’s proposed 

framework for simplifying the mechanics of the best interest contract, as well as Fidelity’s views on 

several other commenters’ proposed alternatives for creating a legally-binding best interest 

commitment.

6

 We provide further responses to those questions below.

1. The Best Interest Contract Is Unnecessary for ERISA Plans.

One of the most important simplifications our paradigm offers is that it avoids the redundant 

and unnecessary contract requirement for ERISA-governed plans. ERISA’s fiduciary duty rules 

 5 We understand that the Department is concerned that investment advisors may have undisclosed conflicts of interest when 

negotiating the scope of their engagement. But our proposal addresses this concern by requiring advisors to disclose all 

material conflicts of interest before they are engaged. 

6 See Conflict of Interest Proposed Rule, Related Exemptions and Regulatory Impact Analysis Hearing Transcript 

(“Hearing Tr.”) at 581:22-589:12 (Aug. 11, 2015).
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already require firms providing investment advice to plans and participants to act in their clients’ best 

interest. Plans and participants also already have the right to sue for breach of these fiduciary duties –

they don’t need a contract to do that. The best interest contract would therefore provide no additional 

benefit to ERISA-governed plans or their participants. And where the contract requirement offers no 

benefit, the costs and burdens required to implement it, for both firms and investors, cannot be 

justified. 

During the Public Hearings, Mr. Hauser asked whether Fidelity would be amenable to a BIC 

Exemption that allowed firms to enter into contracts at the plan level, rather than having each and 

every plan participant sign a separate agreement. Although we acknowledged that this would be a 

substantial improvement over the current proposal, it is still unwarranted. In order to comply with this 

alternative proposal, Fidelity would have to expend a significant amount of time and effort creating, 

distributing, potentially negotiating, and securing execution of new contracts for each of the more than 

23,000 plans that we service. In order to meet their own obligations as fiduciaries, each plan sponsor

also would need to carefully review and potentially negotiate the contract, adding additional and 

unnecessary time and expense to be borne by the plan. Because the proposed best interest contract

does not provide any additional benefit for plans or their participants beyond the benefits already 

conferred by ERISA, these costs would not be warranted.

2. A Unilateral, Legally-Binding Commitment for IRA Holders Would Be Far 

Less Burdensome and Equally Protective of Investors.

a. The Proposed BIC Exemption’s Signature Requirement Would Be 

Extremely Burdensome and Ultimately Would Deprive Many Investors 

of Access to Advice.

For IRA investors who are not covered by ERISA’s fiduciary duty rules, Fidelity has no 

objection to imposing a legally-binding best interest commitment. But, by requiring signatures from 

multiple parties in order to effectuate this commitment, the contract requirement proposed by the 

Department would be extremely onerous, if not impossible, for firms to implement. Under this regime, 

the BIC Exemption would be largely unattainable, and many investors would therefore lose access to 

investment advice.

7

 

 7 As proposed, the best interest contract would have to be executed not only by the firm and the retirement investor, but also 

by each and every individual representative who provides that investor with advice. For firms like Fidelity – that interact 

with investors primarily through call centers – this requirement would render the BIC Exemption impossible to meet, 

because each time an investor calls a different representative is likely to answer. During the hearing, the Department 

appeared to appreciate the problems inherent in requiring individual representatives to execute the best interest contract. 

Accordingly, we assume for purposes of this supplemental letter that this requirement will be removed from the final BIC 

Exemption. We note briefly, however, that such a requirement would be both unnecessary and unprecedented: customers 

can hold firms accountable for any losses stemming from a violation of the BIC Exemption; and, so long as firms can be 

held accountable to customers for their representatives’ conduct (not to mention accountable to state regulators, FINRA, 

and other SROs for any failure to adequately supervise their representatives), they have every incentive to ensure that their 
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In theory, in order to comply with the BIC Exemption, Fidelity would only be required to 

obtain signed contracts from those customers who seek our investment guidance. But, in practice, we 

would need to attempt to execute contracts up front with all of our more than eight million IRA 

customers, because (1) many of our customers do, in fact, seek guidance at some point in time, and we 

would need to be able to provide that guidance promptly upon request without first having to go 

through the contracting process, and (2) maintaining contracts with only a subset of our customers 

would require us to build, maintain and operate an extraordinarily complex tracking system, which 

would only increase the already substantial costs required to comply with the BIC Exemption.

Our primary concern is not just that it would be expensive to print and mail out contracts to our 

eight million IRA customers. Our primary concern is that it would be impossible in practice to ensure 

that we received those millions of contracts back with all required signatures. Investors are 

accustomed to receiving documents from Fidelity in the mail, but they generally are not accustomed to 

having to affirmatively respond to those documents. When we do ask customers to respond to written 

communication, surprisingly few of them comply. Here are a couple of examples:

• Fidelity regularly sends out letters to customers requesting certain critical information if 

it is missing from their accounts, but many customers never respond to these requests. 

For example, in June 2014 Fidelity sent 714,480 letters to IRA holders notifying them 

that they had failed to provide beneficiary information when opening their account; 

within the next six months, only 112,275 (or 16%) responded by designating a 

beneficiary. 

• When customers make a request from Fidelity (such as a request to trade, or a request 

for distribution) but they fail to provide all the information necessary for Fidelity to 

comply with that request, the request is deemed “not in good order” (or “NIGO”), and 

Fidelity sends the customer a follow up letter asking for the missing information. A 

2014 study demonstrated that more than one-third of customers do not respond to the 

NIGO letter, even though they initiated the request in the first place.

Additionally, attempting to collect hard copy signatures from investors would be extremely 

expensive. In its Paperwork Reduction Act Statement to the BIC Exemption, the Department assumes 

the best interest contract provisions “will be inserted into existing contracts with no additional cost for 

production, distribution” or signature collection.8

 But that assumption is simply not correct for our 

more than eight million existing IRA customers, who already have account agreements in place. For 

these existing customers, the cost to produce, distribute and attempt to collect these agreements is 

likely to be enormous. In our NIGO study (discussed above), we estimated that, on average, it cost 

 

representatives comply with the terms of their agreements, and to discipline or terminate them if they fail to do so. This 

system works perfectly well in all other commercial contexts, and there is no reason why it wouldn’t work equally well 

here.

8 80 Fed. Reg. at 21980.
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Fidelity $11.63 to collect missing information from an account holder.9 Using this NIGO data – and 

assuming that the more than 3.4 million IRA holders who choose to receive hard copy statements 

would also elect to receive the best interest contract in hard copy – we estimate that the cost to Fidelity 

just to attempt to secure executed, hard-copy best interest contracts from our existing IRA customers 

would be at least $40 million.10 Moreover, even with this enormous expense, we expect that we would 

only receive back a fraction of the signatures required by the BIC Exemption.

b. Fidelity’s Proposal for a Legally-Binding, Unilateral Best Interest 

Commitment Would Be Far Less Burdensome but Equally Protective.

In order to avoid these logistical obstacles, Fidelity has proposed that the Department permit 

firms to make a unilateral, legally-binding best interest commitment to IRA customers. As we 

explained in Fidelity’s July 21, 2015 Comment Letter, these unilateral contracts would have the same 

force and effect as a fully-executed written agreement and would serve just as well to achieve the 

Department’s objectives. But, because the mechanics are simpler, allowing firms to unilaterally 

commit to the best interest standard would make it far less costly for them to comply with the BIC 

Exemption, and far easier for them to bind themselves to the best interest standard for all of their 

retirement investors. 

The unilateral contract would include all of the representations set forth in the proposed BIC 

Exemption. It would make clear that its representations are contractual in nature, and that the investor 

accepts the terms of the contract by proceeding to transact business with the firm. Firms could post the 

unilateral contract on their website, but they would also have an obligation to convey this legallybinding commitment directly to each accountholder. Firms would be permitted to choose any 

reasonable method for communicating the best interest commitment, including by using each 

accountholder’s preferred channel of communication (be it phone, mail or electronic delivery).11 If a 

firm wishes to collect signatures back from IRA holders it may do so, but no investor signatures would 

be required. By giving firms the flexibility to bind themselves to the best interest standard in whatever 

 9 This cost estimate includes (1) the costs to print, mail, and distribute the letters, (2) the costs to field related phone calls 

from the customers who receive those letters, and (3) the costs to enter the missing information into the necessary systems 

upon receipt. If anything, the costs would be higher for the best interest contract because (1) it would be a longer 

document, (2) it would likely result in more phone calls with questions from recipient customers, and (3) in the absence of a 

customer-initiated request, it likely would require more follow up from Fidelity to secure a signed response.

10 If the Department makes no changes to the BIC Exemption, then this $40 million estimate would be only the tip of the 

iceberg: Indeed, we expect this estimate for securing hard copy signatures would more than triple to over $120 million if 

Fidelity were also required to obtain signed contracts from the 18 million-plus participants in the defined contribution plans 

that we service.

11 For example, firms could disseminate it (1) orally to investors seeking advice on the telephone; (2) in connection with the 

account statements that existing customers regularly receive (either electronically or in hard copy, depending on the 

customer’s preference); (3) as part of the account opening documents for new customers, or in amended account documents 

for existing customers; (4) by implementing a pop up box or click-through for investors who log on to their accounts 

electronically; or (5) using a combination of different delivery methods for different types of customers.
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manner makes the most sense for their own business model, and by eliminating the unnecessary 

requirement that firms collect back signed documents from every retirement investor, Fidelity’s 

proposed unilateral contract would greatly reduce the cost to firms of complying with the BIC

Exemption, and greatly increase the number of best interest commitments actually made. 

c. The “Negative Consent” Agreement Raised by the Department During 

the Public Hearings Would Also Be a Viable Alternative.

During the Public Hearings, Mr. Hauser asked us about several different alternatives for 

implementing the best interest contract that have been proposed by other commenters.12 Although Mr. 

Hauser did not provide precise detail about each of the alternatives raised, upon reflection we believe 

that one of his proposals – the “negative consent agreement” – could be feasible for Fidelity. Indeed, 

as we understood it, Mr. Hauser’s proposed “negative consent agreement” is, in this context,

effectively the same thing as our proposed unilateral contract. In both cases, the firm would make a 

commitment to its investors, and the investors would accept that commitment by continuing to transact 

business with the firm.13 Thus, like our proposed unilateral contract, a negative consent agreement 

would be feasible so long as firms are permitted to choose the most efficient method of delivery. 

Mr. Hauser also asked us about another proposal made by some commenters that would still 

require a written signature, but would shift the timing and permit investors to sign the best interest 

contract after receiving investment advice or guidance, perhaps at the time of account opening for new 

customers or at the time a trade is placed.14 Unlike the “negative consent agreement,” this proposal is 

not feasible and would not accomplish the Department’s objectives. This proposal could harm 

investors because, once a Fidelity call center representative provides an investor with advice, that 

investor may wish to trade immediately. If there is not yet a best interest contract in place, then the 

investor’s trade would have to wait until Fidelity mails a contract and the investor signs the contract 

and returns it to Fidelity. The resulting delay in trading activity could be harmful to the investor 

because, for example, it might result in adverse market movement or negative tax consequences.

15 At 

 12 See Hearing Tr. at 575:8-581:21 (Aug. 11, 2015).

13 See, e.g., Ryan, Beck & Co. v. Fakih, 268 F. Supp.2d 210, 219 (E.D.N.Y. 2003) (plaintiffs’ “negative consent” after their 

receipt of a notice of the transfer of their accounts caused the new client agreements to become the controlling contracts for 

their accounts); UBS PaineWebber, Inc. v. Brown, 880 So.2d 411, 415 (Ala. 2003) (Plaintiff’s continuation of his 

relationship with broker after the transactions at issue “precludes his denial of acceptance of the terms” of the contract 

communicated to him in “negative consent letters”).

14 See Hearing Tr. 576:18-577:8 (Aug. 11, 2015). We understand that, under this proposal, the contract would be made 

“retroactive” to cover the earlier advice. 

15 Some commenters have suggested that this problem could be solved by allowing execution of the contract to be delayed 

until after the investor places his trade. But this ignores the reality that customers often fail to comply with requests to sign 

or return documents; and if a customer does not sign the best interest contract, then his earlier trade would be a prohibited 

transaction. Because firms will not risk – and should not be asked to risk – engaging in a prohibited transaction, this 

proposal clearly does not work.
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the same time, the proposal is not feasible because investors may also choose to wait days, weeks or 

even months before following an investment recommendation, and firms have no way to know 

whether or not particular trades placed by an investor are the result of prior investment advice. The 

only way to avoid unintentionally engaging in a prohibited transaction in this scenario would be for 

firms to completely freeze an investor’s account whenever advice has been provided, and to prohibit 

all trading (whether or not based on advice) until a best interest contract is signed.16 This result not 

only would be harmful to investors, it also could be impermissible under the securities law, which 

generally would prohibit broker-dealers from refusing to process a sell order. 

* * *

In summary, Fidelity recommends that the Department adopt a rule that (1) allows advisors to 

establish the terms and conditions of their engagement outside of the fiduciary context (2) eliminates 

the contract requirement for ERISA-governed plans and (3) permits firms/advisors to unilaterally 

establish a legally-binding, best interest commitment to IRA investors. A rule that incorporates such 

changes would still fully satisfy the Department’s objective of binding firms to the best interest 

standard for investment advice, but it would do so in a way that is far less burdensome than the current 

proposal. 

II. Advisors Should Not Be Required To Bear the Enormous Costs of the BIC Exemption’s 

Transaction and Annual Disclosure Requirements.

Whether or not the Department adopts the general framework of Fidelity’s new best interest 

paradigm, it must eliminate the unduly onerous requirements for complying with the BIC Exemption. 

During the Public Hearings the Department asked panelists to provide additional support for 

their position that the Proposed Regulation and exemptions would be extremely costly to implement.17 

Mr. Hauser requested that commenters break down these expenses, in order to allow the Department to 

separately weigh costs and benefits for each of the discrete requirements in the Proposed Regulation.18 

In this submission, we provide information that we hope will assist the Department with this endeavor. 

Because it was not feasible in the time allotted to prepare a detailed cost assessment for every 

component of the Proposed Regulation, we have elected to focus on the disclosure requirements in the 

BIC Exemption.19 As explained in Fidelity’s July 21, 2015 Comment Letter, we do not believe that 

 16 Moreover, as we explained during the Public Hearings, for firms like Fidelity that may recommend their own funds, even 

such a drastic measure would not be sufficient to avoid all risk of engaging in a prohibited transaction, because the 

retirement investor could simply make the trade in another retirement account, through another broker dealer.

17 See, e.g., Hearing Tr. 83:6-21 (Aug. 10, 2015).

18 See, e.g., Hearing Tr. 81:19-25 (Aug. 10, 2015); Hearing Tr. 520:14-521:9 (Aug. 11, 2015).

19 Nonetheless, our experience tells us that the Department has vastly underestimated compliance costs across the board, 

and we hope the Department will extend the concepts and principles set forth in this focused cost analysis as it continues to

assess other aspects of the proposed rule. 
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either the transaction disclosure or the annual disclosure would provide any meaningful benefit to 

investors, and, thus, we have not included them as part of our new best interest paradigm.20 In this 

submission, we add a focused assessment of the costs that would be required to implement the annual 

disclosure, and a higher level discussion of implementation costs associated with the transaction 

disclosure. For each proposed disclosure, we then discuss why these costs far outweigh any potential 

benefit to investors. 

A. The Costs of the Annual Disclosure Requirement Substantially Outweigh Any 

Benefit.

1. The Department Has Vastly Underestimated the Costs of Complying with the 

Annual Disclosure Requirement.

The BIC Exemption would require firms to provide an annual disclosure to all retirement 

investors, within 45 days of year-end, that includes (1) a list of every Asset that the Retirement 

Investor purchased or sold that year, as well as the price paid or received, (2) the total dollar amount of 

all fees and expenses incurred by the Retirement Investor for each Asset purchased, sold or held during 

that year, and (3) the total dollar amount of all compensation received by the financial institution and 

its affiliates, directly or indirectly, from any party, as a result of each asset purchased, sold or held by 

the retirement investor during that year.

The Department has vastly underestimated the costs of complying with this annual disclosure 

requirement. In its Paperwork Reduction Act Statement for the BIC Exemption, the Department 

estimated that, industry-wide, the cost to implement all aspects of the proposed BIC Exemption –

including the contract itself, the three disclosure requirements and the data retention requirements –

will be $77.4 million during the first year and $29.2 million in subsequent years.21 The Department 

attributes all but a tiny fraction of these estimated costs to printing and mailing expenses and presumes 

that all other implementation costs will be de minimus. For example, the Department estimates that the 

“IT Costs” required for each firm to implement the entire BIC Exemption in year one – again including 

the contract itself, the three disclosure requirements and the data retention requirements – will be less 

 20 Instead, we proposed an alternative disclosure regime that would be far more useful for retirement investors. Our 

proposed two-tiered approach includes (1) a website that would enable the investor to obtain the estimated cost and 

compensation associated with all products and services offered by the advisor, and (2) a “static” disclosure provided before

recommendations are made that would explain the scope of the advisor’s services, describe any material conflicts of 

interest, and include a link to the website disclosure. See Fidelity’s July 21 Comment Letter at 6-7.

21 80 Fed. Reg. at 21983; DOL, Fiduciary Inv. Advice: Regulatory Impact Analysis, P. 177 (Apr. 14, 2015). 
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than $8,000.22 The Department also assumes that there will be zero “IT Costs” relating to the BIC 

Exemption in subsequent years.23 

The Department’s cost estimate grossly understates what would be required to implement the 

BIC Exemption in general, and the annual disclosure in particular. As explained below, we estimate 

that implementing just the annual disclosure would cost Fidelity alone more than $46 million for 

the first year, and more than $18 million annually thereafter. The charts below summarize the 

breakdown of these expenses:

Start Up and Year One Expenses

Expense Minimum Cost

Cost to develop functionality for aggregation and processing of 

data concerning asset purchase price and hard dollar fees $6 million

Cost to develop functionality for aggregation and processing of 

data necessary to allocate fund expenses to individual 

investors/investments

$9.5 million

Cost to develop functionality for aggregation and processing of 

data necessary to allocate compensation to individual 

investors/investments

$10 million

Other startup costs24 $2 million

Annual expenses for year one (see below) $18 million

Total Start Up and Year One Expenses $46 million

 22 80 Fed. Reg. at 21981-82 & n. 50 (“The department estimates that updating computer systems to create the required 

disclosures, insert the contract provisions into existing contracts, maintain the required records, and publish information on 

the Web site will require 100 hours of IT staff time during the first year,” at a cost of less than $80/hour). 

23 80 Fed. Reg. at 21982 n.52. 

24 There are numerous additional costs required to implement the annual disclosure that have not been discussed in detail in 

this letter, including, for example, the cost to develop a template for the annual disclosure, to conduct initial trainings for 

our representatives on how to answer questions about the annual disclosure, and for our legal and compliance departments 

to ensure that the disclosure (and the process for generating the disclosure) fully comply with the Department’s Proposed 

Regulation. 
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Ongoing Annual Expenses

Expense Minimum Cost

Cost to print and distribute the annual disclosure $14 million

Cost to respond to questions from customers following receipt of 

the annual disclosure $3 million

Cost to maintain the systems and databases used to generate the 

annual disclosure $400,000

Cost to store the annual disclosures for at least six years $400,000

Cost to train new representatives on how to answer questions 

from investors about the annual disclosure $150,000

Total Ongoing Annual Expenses $18 million

These estimates are not mere guesswork. They are based on Fidelity’s past experiences and the 

result of a detailed cost assessment process for each area of our business that would be impacted by the 

Proposed Regulation. Many different types of employees participated in our cost assessment process, 

including, among others, personnel in finance, technology, risk and compliance, product management, 

analytics, digital communications, distribution services, and platform support. These personnel were 

briefed regarding requirements of the annual disclosure that are expected to affect areas within their 

responsibility, and were tasked with estimating the costs they anticipate from these new requirements 

based on their knowledge of Fidelity’s systems and practices and their experience implementing 

system changes in the past. Although we are confident that this process resulted in a realistic estimate 

of implementation costs, our experience tells us that, if Fidelity actually tried to comply with the 

proposed annual disclosure requirement, we would discover numerous additional costs and 

complications that could not be anticipated. Accordingly, we consider these cost estimates to be a 

floor, rather than a ceiling.

a. Fidelity’s Estimated Cost To Collect and Process Information about 

Purchases, Sales and Hard Dollar Fees 

The proposed annual disclosure would require firms to report both (1) a list of assets purchased 

and sold, along with the price for each purchase or sale, and (2) the “total dollar amount” of fees and 

expenses paid by each investor (directly or indirectly) for each investment in his or her account over 

the course of the prior year.25 There are numerous different types of hard dollar fees and expenses that 

 25 It is unclear whether the annual disclosure requirement is intended to apply to all investments in the retirement investor’s 

account, or only those that were recommended by the firm. But, because Fidelity has no way to track whether or not a 

particular investment was the result of advice or made independently, for purposes of this cost analysis we have assumed 

that all investments in each retirement account would have to be included in the annual disclosure. Also for this reason, we

have assumed that Fidelity will need to send annual disclosures to all of its retirement account customers.
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would need to be factored into this calculus, including (but certainly not limited to): (1) commissions, 

(2) concessions, (3) redemption fees, (4) exchange fees, (5) regulatory fees, (6) short term trading fees, 

(7) stamp duties and other taxes collected on foreign stocks, (8) currency exchange fees, (9) mutual 

fund low balance fees, (10) fees charged on reorganizations, (11) fees charged on foreign dividends, 

and (12) at least 6 different types of fees charged on annuities. Although Fidelity maintains 

information about account holdings, purchase and sales prices, and hard dollar fees, this data is stored 

across multiple platforms, and not on one central recordkeeping system.26 Accordingly, we would 

need to develop functionality that can retrieve this data from multiple systems and aggregate it on an 

investor-specific and investment-specific level. We estimate that it would cost Fidelity at least $6 

million to develop this functionality.

27

b. Fidelity’s Estimated Cost To Collect and Process Information about 

Fund Expense Ratios 

Fidelity’s recordkeeping systems currently track only those fees that are assessed directly upon 

investors and not “indirect” fees incurred by individual investors, such as fund expense ratios. 

Building a new system that is capable of attributing fund expense ratios to individual investors would 

be an enormous undertaking. Converting a fund’s expense ratio into a precise hard dollar amount 

attributable to a single investor is not a simple matter of multiplying the investor’s year-end balance by 

the fund’s year-end expense ratio. Instead, because fund fees are assessed daily, we would have to 

build an engine that has access to, and can factor in, daily values for both (1) the investor’s holdings 

and (2) the fund’s expense ratio.28 For an individual investor who holds three funds (which is about 

average for our retirement investors), this would require Fidelity to collect and store over 750 separate 

data points. And, if you multiply that amount by the 26 million-plus retirement investors serviced by 

Fidelity, that’s approximately 1.9 billion data points per year just to capture the necessary holdings 

information. We would also need to collect and store data from more than 700 different fund 

complexes reflecting the daily expense ratios for the more than 20,000 different fund share classes sold 

 26 Additionally, the data stored on these systems sometimes cannot be linked to a particular investment, as required for the 

proposed annual disclosure. For example, adjustments to fees might not be linked to any particular investment or prior fee 

charged. 

27 All expense estimates in this letter include the costs to (1) create data feeds across the multitude of systems that house the 

data necessary to prepare the annual disclosure (including both Fidelity systems and third-party systems), (2) store the data 

necessary to prepare the annual disclosure, (3) develop new systems and software capable of allocating fees and 

compensation to individual investors and investments, and (4) run regression testing on all new software and systems to 

ensure that they function property and comply with Department requirements. 

28 These amounts will often vary from one day to the next, depending on (1) the amount and timing of the investor’s 

contributions (which are often as frequent as every week), (2) the amount and timing of any exchanges or redemptions 

made by the investor (including those resulting from regular rebalancing), (3) the amount and timing of any loans taken 

from the account, or loan repayments made, (4) variations in the fund’s expense ratio due to performance adjustments, cash 

basis fees, daily net asset fluctuations and accrual to payment difference true-ups. 
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on our platform, adding more than 5 million more data points to the equation.

29 We estimate that it 

would cost Fidelity at least $9.5 million to build a system that can collect, store and process the 

massive amount of data necessary to attribute fund expenses to individual investors. 

c. Fidelity’s Estimated Cost To Collect and Process Information about Its 

Compensation 

In addition to requiring disclosure of fees and expenses on a per-investor, per-investment basis, 

the proposed annual disclosure would also require firms to provide the “total dollar amount” of any 

compensation that they have received as a result of each investment.30 To the extent that such 

compensation stems from fees and expenses paid by the investor to Fidelity or its affiliates, this 

disclosure requirement may overlap with the “fees and expenses” disclosure, but the overlap is far 

from complete. For example, expense ratios on non-Fidelity funds and fees paid to unaffiliated 

subadvisors on Fidelity funds both count towards the investor’s fees and expenses but not towards 

Fidelity’s compensation. There are also additional sources of compensation that would have to be 

factored into this disclosure. Once again, these third-party payments are not currently allocated to 

individual investors or investments. Fidelity would therefore need to build a new database that can 

house the complete universe of compensation-related data (which is presently stored on more than a 

dozen separate systems), as well as data on individual investor account holdings. We would also need 

to engineer a new system with completely new functionality, based on complicated formulas derived 

from each relevant third-party agreement, that could allocate third-party payments across individual 

investors and investments. (To avoid overstating compensation, this system also would need to be 

capable of backing out third-party payments that are used to pay plan expenses or that are allocated to 

plan participants.) We estimate that the cost to build such a system would be at least $10 million.

d. Fidelity’s Estimated Ongoing, Annual Costs 

In addition to these and other startup costs, Fidelity would also have ongoing annual costs 

related to printing and distributing the annual disclosure (approximately $14 million),31 responding to 

questions from customers following receipt of the annual disclosure (approximately $3 million), 

maintaining the systems and databases used to generate the annual disclosure (approximately 

$400,000), storing the annual disclosures for at least six years (approximately $400,000), and training 

 29 Because Fidelity sometimes provides expense reimbursement to its plans out of the compensation it receives, an 

investor’s costs could be overstated unless Fidelity also pulls in data showing whether such reimbursements were credited 

to a participant’s account and reduces the total cost of each investment by the amount of any associated reimbursement 

payment).

30 Although the proposed rule could be construed to also require disclosure of any investment-related compensation paid to 

individual representatives, the costs of such a disclosure have not been factored into this analysis. 

31 In calculating this figure, Fidelity has followed the Department’s assumption in its Paperwork Reduction Act Statement 

to the BIC Exemption that the annual disclosure will be mailed to 62% of defined contribution plan participants and 50% of 

IRA holders, and that it will be delivered electronically to all other retirement accountholders. 80 Fed. Reg. at 21982. 
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our representatives on how to answer questions from investors about the annual disclosure 

(approximately $150,000). 

* * *

All told, we estimate that the annual disclosure alone would cost Fidelity at least $46

million to implement in year one, and at least $18 million annually thereafter.32 Although we 

recognize that some of this expense is reflective of Fidelity’s size and scale, many of these costs would 

be equally applicable to smaller firms. For example, every firm that sells mutual funds would have to 

collect and process massive amounts of data concerning daily holdings and expense ratios for all of the 

funds they offer in order to calculate the amount that their clients “paid” in fund-related expenses. 

Similarly, most firms would need to develop and build entirely new functionality capable of tracking 

the firm’s compensation (including changes to compensation arrangements over time) and 

appropriately allocating that compensation across all of their investors’ holdings. There is simply no 

way to collect all of this data, or build functionality to properly allocate it, without incurring many 

millions of dollars in implementation costs. We expect these costs may make the BIC Exemption too 

expensive to implement for many firms, which would result in a significant loss of competition in the 

marketplace for retirement financial services.

Additionally, we estimate that it would take at least 24 months to design, develop, build, 

test and populate the new databases and systems required to produce the annual disclosure. This 

estimate assumes not only that third parties would promptly provide us with necessary data, but also 

that all of our resources could be devoted to the annual disclosure project. If Fidelity were 

simultaneously required to build systems and functionality to comply with the other requirements in 

the Proposed Regulation – including the other two disclosure requirements in the BIC Exemption –

then it would take at least three years to complete this project.

2. The Burden of Producing the Annual Disclosure Far Outweighs Any Benefit to 

Investors. 

The immense burden that would be required to comply with the proposed annual disclosure is 

unwarranted, because the proposed disclosure would add little to the total mix of information about 

investment-related expenses and compensation that is already available to retirement investors. 

For ERISA-governed plans, under the Department’s existing regulations (1) plan participants 

already receive full disclosure of the significant fees and expenses associated with their investments –

expressed as both a percentage of assets and as a hard dollar amount for each $1,000 invested, and 

(2) plan sponsors/administrators already receive full disclosure of compensation paid to service 

 32 On top of these costs, Fidelity will likely need to incur significant additional expense providing information to third-party 

advisors for accounts custodied by Fidelity, so that these third-party advisors can meet their own annual disclosure 

requirements. See Fidelity’s July 21 Comment Letter at C-9.
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providers in relation to plan investments, including disclosure of compensation from revenue sharing.33 

Any marginal benefit to participants from receiving the personalized fee and compensation information 

contemplated by the proposed annual disclosure is greatly outweighed by the extraordinary costs that 

firms would have to incur in order to compile and produce this information in a manner that is 

particularized to each investor’s annual investment history. Indeed, it is difficult to fathom how the 

Department could now impose such costs when, just a few years ago, it determined that the new 

disclosure rules under ERISA §§ 404(a) and 408(b)(2) adequately informed plan sponsors and 

participants of their fees and expenses, and of the related compensation paid to firms like Fidelity. It 

was extremely expensive and time consuming for the industry to develop systems to implement those 

disclosure rules, and there have been no changes over the past three years that would justify the 

Department’s proposal to make firms start the development and implementation process all over again.

The proposed annual disclosure would also offer very little new information to IRA holders. 

As many commenters have noted, all commissions or concessions earned on trades in an IRA account 

must already be disclosed on the trade confirmation or through the delivery of a fund prospectus.34 

Moreover, for the approximately 47% of IRA assets that are invested in mutual funds,35 investors are 

already required to receive prospectuses that contain detailed information about the funds’ expense 

ratios and other applicable fees. The same disclosure requirements exist for ETFs and closed-end 

mutual funds; and the vast majority of the remaining assets in IRA accounts are stocks and bonds, 

which do not typically have any related fees or expenses, other than the commissions that must already 

be disclosed.36 

In short, given the mix of information about fees and compensation that is already available to 

retirement investors and plan sponsors, any marginal benefit that investors might gain from the 

proposed annual disclosure pales in comparison to the enormous costs that firms would have to bear in 

order to comply with this disclosure regime. 

 33 See 29 CFR 2550.404a-5(c), (d) (2011); 29 CFR 2550.408b-2(c) (2012). Because it is the fiduciary obligation of the plan 

sponsor/administrator to ensure reasonable compensation on behalf of the plan’s participants, the Department has 

appropriately determined that such compensation-related information need be shared only with plan sponsors/

administrations, and not with individual plan participants. Indeed, in response to argument by commenters “that the burden 

associated with attempting [to quantify the value of revenue sharing] would be significant and vastly outweigh any 

potential benefit to participants and beneficiaries,” the Department declined to require any quantitative assessment of 

revenue sharing in the participant fee disclosure rule. 75 Fed. Reg. 64910, 64913-14 (Oct. 20, 2010).

34 See 17 CFR 240.10b-10; FINRA Rule 2210; SEC Form N-1A. 

35 See 2015 Investment Company Fact Book, Ch. 7: Retirement and Education Savings, Figure 7.17, Investment Company 

Institute (2015) (http://www.icifactbook.org/fb_ch7.html#asset). 

36 Approximately 88% of IRA assets are invested in one of the investment vehicles discussed above. The remaining 

approximately 12% of IRA assets are invested in annuities and bank and thrift deposits, which are subject to their own 

disclosure regimes. See 2015 Investment Company Fact Book, Ch. 7: Retirement and Education Savings, Figure 7.17, 

Investment Company Institute (2015) (http://www.icifactbook.org/fb_ch7.html#asset); SEC Form N-4; NAIC, Annuity 

Disclosure Model Regulation (Model 245); 12 CFR 230 (1992) (Regulation DD).
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B. The Costs of the Transaction Disclosure Requirement Substantially Outweigh Any 

Benefits.

1. The Department Has Vastly Underestimated the Costs of Complying with the 

Transaction Disclosure Requirement.

The BIC Exemption would require firms to provide a transaction-based disclosure to all 

retirement investors, prior to the time of purchase, that consists of a chart projecting the “Total Cost,” 

in dollars, of each recommended investment, assuming that the Asset is held for 1-, 5- and 10-year 

periods. Advisors would be required to make “reasonable assumptions” about the amount invested and 

investment performance over time in calculating these projections. 

Although the tight timeframe for submitting supplemental comments did not allow Fidelity to 

thoroughly assess the costs associated with the proposed transaction disclosure, there is no question 

that this disclosure would also be far more expensive to implement than the Department anticipates. 

Implementing the transaction disclosure would, at a minimum, require firms to: (1) collect and compile 

in one database all available information about nearly every type of fee or expense that could be 

charged in connection with investments in every single investment vehicle offered to retirement 

investors; (2) regularly update the information in this database to capture fee changes; (3) develop new 

software, systems and code that can be used to calculate the required projections, based on the fee and 

expense information in the database and the various assumptions entered by the representative; 

(4) spend substantial legal and compliance time developing and carrying out policies and procedure 

designed to ensure that, in fact, the assumptions being used by representatives to produce the 

disclosure are reasonable; (5) store all transaction disclosures used for at least six years; and (6) hire 

additional representatives to service customers, because interactions with investors will take 

substantially longer if the transaction disclosure is imposed. 

Once again, none of these costs is even mentioned by the Department in its Paperwork 

Reduction Act Statement to the BIC Exemption, which focuses almost exclusively on printing and 

mailing expenses. Moreover, even that analysis significantly understates the burden that the 

transaction disclosure would impose. In assessing printing and mailing costs, the Department assumes 

that all financial institutions, in aggregate, “will send two point-of-sale transaction disclosures each 

year to 1.1 million defined contribution plans [sic] participants and 20.2 million IRA holders.”37 But, 

in 2014, Fidelity alone provided investment guidance through our portfolio review tools to plan 

participants on more than 524,000 separate occasions38 and to IRA holders on more than 200,000 

separate occasions.39 On average, we presented more than 20 investment options during each guidance 

 37 80 Fed. Reg. 21982. 

38 Although some of these guidance interactions involve asset allocation rather than model fund portfolios, the majority do, 

in fact, result in guidance concerning specific investment options. 

39 These figures include electronic guidance, on the assumption that investors who previously used electronic guidance 

tools will switch to seeking telephonic guidance if, as proposed, the final BIC Exemption excludes web-based advice. 
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interaction with plan participants, and more than 10 investment options during each guidance 

interaction with IRA holders. Assuming these 2014 numbers hold steady, Fidelity alone would have to 

provide more than 12 million transaction disclosures each year. Clearly, then, the Department has 

grossly underestimated the number of transaction disclosures that would be required – and, thus, the 

burden of making such disclosures, both on firms (who have to prepare and deliver them) and on 

investors (who will not be permitted to receive advice until they have been prepared and delivered). 

There are also several non-monetary costs associated with this disclosure that make it 

unworkable. First, as many commenters (including FINRA) have noted, the proposed requirement that 

firms incorporate “reasonable assumptions about investment performance” into their cost projections 

conflicts with FINRA Rule 2210(d)(1)(F). So, if this proposed disclosure requirement is imposed, 

broker-dealers will be prohibited by FINRA from complying with the BIC Exemption. 

Additionally, because the transaction disclosure must take the form of a chart – and cannot be 

conveyed orally – it would severely impair the ability of firms to provide guidance over the telephone. 

In theory, a call center representative could email a link with the chart to an investor while they are 

conversing. This appears to be what the Department envisions, because it assumes that 75% of these 

transaction disclosures will be distributed electronically. But customers do not always call from a 

location where they have easy access to their email. And, even when email access is possible, this 

requirement would still substantially increase the amount of time required for each call, at the expense 

of not only the firm, but also the customer’s experience.

2. The Burden of Implementing the Transaction Disclosure Far Outweighs Any 

Benefit to Investors. 

In our view, the transaction disclosure requirement offers little, if any, benefit to offset these 

substantial costs. For one thing, it seems entirely unrelated to the stated purpose of the Proposed 

Regulation, which is to mitigate conflicts of interest. The contemplated disclosure would simply 

project the costs that an investor might incur, over time, for whatever investment is recommended. It 

would say nothing about the advisor’s related compensation, which is presumably the basis for the 

conflict of interest. Moreover, because firms would only be required to prepare cost projections for the 

funds they are recommending – and not for alternative peer funds – this disclosure would do nothing to 

advance the Department’s stated goal of allowing investors to compare the costs of recommended 

funds to the costs of other investment alternatives.

 Nonetheless, more than 100,000 of these 2014 guidance interactions were, in fact, led by Fidelity representatives, either on 

the phone or in person. Moreover, in addition to the use of our guidance tools, Fidelity representatives regularly have more

informal discussions and respond to questions from customers about investment options. Each of these discussions would 

also be considered investment advice under the Proposed Regulation and, thus, would require the use of additional 

transaction disclosures.
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In fact, by focusing on cost to the exclusion of all else, this disclosure requirement actually 

risks harming investors because it suggests that (at least in the eyes of the Department), cost is the only 

factor that really matters. Consider the following example:

Example: A young college graduate who is just starting his first job calls Fidelity to get advice 

on how to allocate the contributions he will be making to his 401(k) plan. Our representative 

suggests a model portfolio for consideration that is appropriately tailored to his age, and that 

includes substantial investment in several domestic and foreign stock funds, and smaller 

investments in a stable value fund and company stock. Our representative then sends the 

investor the required transaction disclosures for each fund, and the investor decides to take 

some time to think things over. One week later, upon further review of the disclosures – which 

show substantially lower costs associated with the stable value fund and corporate stock fund –

the investor decides to put all of his assets in those two investment options, and none of his 

money in the diversified stock funds. He logs into his 401(k) account and sets up his 

contributions accordingly, without considering long-term performance potential, or considering 

the risks of concentrating a large amount of assets in a single stock. 

Although this example may be a hypothetical, the transaction disclosure does, in fact, create a real risk 

that this scenario will become routine.

Additionally, the transaction disclosure is flawed because it will not provide a reliable measure 

of the one thing that it actually is intended to reflect – costs and expenses over time. There are simply 

too many assumptions that need to be factored into the equation. For example, this disclosure would 

require assumptions about changes over time to: (1) the investor’s salary; (2) the percentage of the 

investor’s salary that she contributes; (3) the extent of the employer’s matching and/or profit sharing 

contributions; (4) investment performance; and (5) fund expense ratios.

40 If an advisor makes 

reasonable changes to even just one or two of these assumptions, it could substantially alter the size of 

the cost projections included in the disclosure.

The highly variable projections required by the transaction disclosure provide a false sense of 

certainty for what are, at best, very rough guesses. Moreover, given that plan participants and IRA 

holders already receive detailed information about fees and expenses associated with their investment 

options through prospectuses and participant fee disclosures, this additional, and different, disclosure 

seems more likely to confuse investors than to help them. There is therefore no basis for the 

Department to subject firms – and ultimately investors – to the substantial costs of implementing this 

disclosure requirement.41

 40 Additionally, given the broad definition of “Total Fees” in the Proposed Regulation, advisors arguably would also have 

to make assumptions about whether the investor is likely to be charged low balance fees, redemption fees, short-term 

trading fees and other similar fees that may be assessed upon a mutual fund shareholder. 

41 If the Department insists on including some sort of transaction disclosure in the final regulation, it should embrace a 

website disclosure requirement like the one we proposed in our July 21, 2015 Comment Letter, which would give investors 
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* * *

As the Department moves forward with the rulemaking process, we hope it will consider these 

comments, and we would be pleased to respond to any further questions.

Sincerely,

Ralph C. Derbyshire

cc: United States Securities and Exchange Commission

The Honorable Mary Jo White, Chair

The Honorable Luis A. Aguilar, Commissioner

The Honorable Daniel M. Gallagher, Commissioner

The Honorable Kara M. Stein, Commissioner

The Honorable Michael S. Piwowar, Commissioner

Financial Industry Regulatory Authority

Mr. Richard Ketchum, Chairman and Chief Executive Officer, FINRA

Mr. Robert Colby, Chief Legal Officer, FINRA

Treasury Department

J. Mark Iwry, Deputy Assistant Secretary for Retirement and Health Policy

National Economic Council

Jeffrey Zients, Director

Elizabeth A. Kelly, Senior Policy Advisor

 

the option of inputting their own assumptions in order to project and compare costs, performance and other factors 

associated with various investment options that they may be considering, see Fidelity’s July 21 Comment Letter at A-8. 
A-1

Attachment A

Fidelity’s New Best Interest Paradigm:

Addressing the Misconceptions

In Fidelity’s July 21, 2015 Comment Letter, we explained that the Department’s proposal 

suffers from two foundational problems that will prevent advisors like Fidelity from providing the 

investment assistance that our customers need: (1) an overly broad definition of investment advice and 

(2) prohibited transaction exemption conditions that advisors will not be able to meet in practice. We 

also proposed a “new best interest paradigm” that we believe solves these problems while still meeting 

the Department’s goals of ensuring that retirement investment advice is in the best interest of the 

investor. While we have received positive feedback on our new best interest paradigm, some have 

criticized the proposal, claiming that it fails to deliver meaningful new protections for investors. These 

criticisms appear to misunderstand how our new best interest paradigm would work. This Attachment 

A addresses a number of the misconceptions about both the paradigm and the Department’s proposal 

that have led to this unwarranted criticism. 

Under our new best interest paradigm, the establishment of the terms and conditions of a 

fiduciary relationship would not itself be fiduciary conduct. This is consistent with well-settled and 

long-standing fiduciary law, and is essential for advice provided in a commercial setting. Within the 

defined scope of the advice relationship, however, advisors’ recommendations would have to be made 

in their investors’ best interest, and investors would have a private right of action to enforce this best 

interest obligation. Any advisor that is not clear with investors about the scope and nature of the 

advice relationship would almost certainly fail to meet this best interest obligation and would therefore 

be subject to liability for engaging in a prohibited transaction. For example, an advisor who sells only 

annuities would need to be clear with the investor about this limitation up front. If the advisor does not 

clearly limit the scope of its advice to annuities, then its investment recommendations would have to 

be compared not only to other annuities, but to the full universe of investment vehicles for purposes of 

determining whether the advisor’s recommendations are in the investor’s best interest.

Our new paradigm would also modify the BIC Exemption so that it is based on the Department’s 

proposed “Standards of Impartial Conduct.” Under our approach, all advisors would be required to: 

• provide a clear, simple, up-front statement to investors about the products and services that will 

be considered in making recommendations, compensation to the adviser and any material 

conflicts of interest, as well as any other material terms and conditions of the advice 

relationship;

• make a legally enforceable commitment to act in the investor’s best interest in making 

investment recommendations; and

• charge no more than reasonable compensation. 

This approach would provide a true principles-based prohibited transaction exemption – something the 

Administration has publicly committed to provide. 
A-2

Misconception No. 1:

The Department’s proposal will result in better advice and investor protection than our new 

paradigm because the proposal imposes a fiduciary standard on advisors’ marketing their own 

advice services and Fidelity’s new best interest paradigm does not.

It is widely acknowledged that the Department’s proposal makes an advisor a fiduciary with 

respect to the establishment of its own services and compensation. In so doing, the Department’s 

proposal effectively prohibits all advisors, fee-based as well as commission-based, from marketing 

their own services and negotiating the terms of their engagement. In Fidelity’s July 21, 2015 

Comment Letter, we refer to this as the “sales dilemma.” Because there is no way to navigate this 

dilemma in a commercial setting, advisors will be forced out of the market, drastically reducing the 

availability of investment advice to all retirement investors. Fidelity’s new paradigm fixes this fatal 

flaw while still imposing a fiduciary best interest standard for all investment advice provided to 

retirement investors.

Some commenters have defended the Department’s proposal by suggesting that subjecting 

marketing and engagement-related activities to a fiduciary standard is a common and workable 

requirement imposed on all fiduciaries, including trustees, investment advisers, doctors, and lawyers. 

This is not true. To the contrary, the Department itself has, in the past, declined to impose fiduciary 

obligations on investment advisors for engagement-related activities: A long-standing Department 

regulation addressing ERISA § 408(b)(2) provides that if a person who is already providing

investment advice to a plan “persuades” a plan fiduciary to extend his contract at a higher fee, the

advisor has not engaged in a prohibited transaction because the advisor has not used any of the

authority, control or responsibility which makes it a fiduciary to cause the plan to pay an additional fee.

In fact, the Department’s proposal is unprecedented in fiduciary law and not commercially 

viable. Consider the following example: 

Example 1: A registered investment adviser develops an expertise in mutual fund investments. 

She markets her mutual fund advice services for a flat annual fee of $500 per year, and enters 

into an arrangement on those terms and conditions with two customers. Customer A is 30 

years old, actively employed, and is willing to risk the loss of principal in order to obtain 

capital appreciation. Customer B is 65 years old, retired, and primarily wants to realize income 

from his savings. 

If the RIA were required to act in her customers’ best interest in recommending herself to 

provide advice, she would first have to consider all other RIAs and potential investment advice 

providers prior to recommending herself, and she would have to recommend another advisor if 

it would be in the investor’s best interest to do so. For example, if there were another advisor 

that charged less for the same services or had a better performance record, the advisor would 

need to recommend that competitor. Such a requirement would be antithetical to commercial 

practice and would not be sustainable in the real world.

Similarly, if the RIA were required to act in her customer’s best interest establishing the scope 

of the investments from which she will make recommendations, the RIA would have to 

compare her proposed investments, mutual funds, against all other investments to ensure that it 

was in her customers’ best interest to consider only mutual funds in making recommendations,

and not those other investments. For example, among other things, the RIA would have to 
A-3

compare mutual funds to individual equity securities for Customer A and against bank CDs and 

annuities for Customer B. Taking all possible investments in the world into consideration 

before making an investment recommendation, as would be required under a best interest 

standard, would of course be impossible. 

Likewise, to act in her customer’s best interest, the RIA would be required to negotiate the 

lowest fee possible on her customer’s behalf. Negotiating against oneself for a lower fee would 

also be antithetical to the commercial environment (isn’t it in the best interest of the customer 

to charge the lowest possible fee, or perhaps provide advice for free?), and the RIA could not 

remain in business for long if subject to such a requirement. 

Our new paradigm solves this problem by drawing a distinction between the establishment 

of an advice framework and the advice provided within that framework, and by applying a fiduciary 

standard only to the latter. Under our paradigm, the advisor would not be subject to a fiduciary duty 

in recommending herself over her competitors or establishing the scope of her services or her own 

compensation. She would thus avoid all of the obvious problems that arise in the example above. 

Once she is hired, however, the RIA would be subject to a fiduciary duty and would be required to 

recommend mutual fund investments in each customer’s best interest. So she would presumably be 

required to recommend high quality equity mutual funds to Customer A and high quality bond or 

capital preservation mutual funds to Customer B. Under our new paradigm, her compensation of 

$500 per year would also have to be reasonable in light of the advice services she actually provides. 

The same analysis also holds true where the advisor’s compensation varies based on the

transactions and services recommended by the advisor.

Misconception No. 2:

Fidelity’s new paradigm fails to apply a best interest standard to the full range of services perceived 

and relied on as fiduciary investment advice.

This misconception has our paradigm completely backwards. The cornerstone of the paradigm 

is that the advisor must be clear up front with investors about the terms and conditions of the 

engagement of the advisor. This will ensure that investors understand the scope of advice services 

being provided and clearly perceive the range of services that can and should be relied upon as 

unbiased investment advice. To the extent the advisor creates a perception that any of the services it 

provides should be relied on by the investor as fiduciary investment advice, our approach subjects 

those services to the best interest standard.

Misconception No. 3:

Because Fidelity’s new paradigm would allow advisors and investors to agree to the scope and terms 

of the advice relationship outside of a fiduciary context, advisors could simply use those terms and 

conditions to evade any fiduciary duties.

Fiduciaries have been permitted to freely negotiate the scope and terms of their services in a 

non-fiduciary capacity under centuries of well-established fiduciary law. Indeed, no other rule is 

workable in the real world. What does not always happen today, and what Fidelity’s new paradigm 

would mandate, is that advisors be explicit about the scope and terms of their advice so that investors 

understand the advisor’s conflicts, compensation and advice limitations. 
A-4

By receiving clear disclosure at the outset of an advisory arrangement about the scope of the 

advisor’s services, compensation and material conflicts, investors will understand what advice the 

advisor is providing in the investor’s best interest, and what discussions or negotiations fall outside the 

advice relationship. According to this misconception, our paradigm creates a “loophole” because 

investors cannot or will not understand or appreciate such up front disclosure and thus advisors can 

simply “disclose away” their fiduciary responsibilities. But if investors cannot understand clear 

disclosures about an advisor’s scope of services, compensation, and potential conflicts, what 

disclosures of any kind could an investor understand? The objection embodied in this misconception 

is, in actuality, an objection to disclosure as a compliance mechanism in any context. And that 

objection is belied by the obvious value the Department itself has placed on disclosure in many, many 

contexts, including the proposal itself and other major regulatory projects under ERISA Section 

408(b)(2) and 404(a) in recent years.

Misconception No. 4:

Fidelity’s new paradigm allows advisors to act on any conflicts of interest as long as they are 

disclosed. Similarly, Fidelity’s paradigm fails to take meaningful steps to curb industry practices 

that encourage advice that is not in the best interest of the retirement saver.

Fidelity’s new paradigm would impose a legally binding obligation on all advisors to act in the 

investor’s best interest in making investment recommendations, regardless of the advisors’ potential 

conflicts of interest. Moreover, it is inconceivable that an advisor could meet this legally binding 

obligation while incenting its individual representatives to act contrary to the investor’s best interest. 

What our alternative would not do is impose a multitude of specific requirements that every 

advisor in every context and every business model must meet (some of which are at best tangentially 

related to ensuring that the advisor is acting in the investor’s best interest). In our view, 

micromanaging such requirements through regulation as the Department has proposed is counterproductive and would serve only to discourage advisors from serving retirement investors. It would do 

nothing to further protect retirement investors.

Misconception No. 5:

Fidelity proposes that the advisor’s recommendations would be subject to a best interest standard, 

but its conflicted compensation would not.

Conflicts do not harm investors solely because an advisor’s compensation can vary. They harm 

investors when and if such variation can result in recommendations made in the advisor’s own interest. 

Fidelity’s new paradigm would forbid an advisor to act in its own interest and would thus prohibit 

acting on such conflicts.

This misconception confuses the process of establishing an advisor’s compensation with 

allowing that compensation to influence the advisor’s investment advice. As explained above, our new 

paradigm would not impose a fiduciary duty on the establishment of the advisor’s compensation – that 

is, our paradigm would not require an advisor to negotiate with itself for a lower fee. But once the 

investor agreed to an advisor’s compensation arrangement, our paradigm would prohibit the advisor 

from taking its compensation into account when providing the investor with advice. 

Example 2: Attorneys have a fiduciary obligation to provide legal advice that is in the best 

interest of their clients. As with investment advice, there may be some relationship between the 
A-5

advice offered and the attorney’s compensation. For example, when charging an hourly rate it 

might be in an attorney’s interest to prolong litigation, while the client’s interests might be 

better served by settling the lawsuit early. The attorney has a fiduciary obligation to put his or 

her self-interest aside and advise the course of action that is in the best interest of the client, 

which, in this example, might include settlement. The lawyer is not, however, required to set 

aside his or her own interests when negotiating the hourly rate that the client will pay for those 

services or other terms and conditions of the attorney’s engagement. The same reasoning holds 

for doctors, trustees, and other types of fiduciaries, and there is no reason why it cannot or 

should not hold for investment advisors.

Misconception No. 6:

If an advisor recommends that a participant rollover her plan balance to an IRA, the advisor has 

necessarily provided fiduciary investment advice with respect to the entire rollover transaction.

This misconception likely springs from ambiguity in the Department’s proposed definition of 

“fee or other compensation, direct or indirect.” The proposal defines that term to mean “any fee or 

compensation for the advice received by the person (or by an affiliate) from any source and any fee or 

compensation incident to the transaction in which the investment advice has been rendered or will be 

rendered.” The italicized language is ambiguous, however, because it is unclear what “transaction” it 

references.

If an advisor advises a plan participant to roll over his 401k balance from his employer’s plan 

to an IRA sponsored by the advisor, one might argue that a single “transaction” has occurred. And if 

this constitutes a single transaction, then so long as the advisor receives compensation with respect to 

some aspect of the rollover, then the compensation requirement is satisfied, and all advice concerning 

the rollover would have to meet the best interest requirement.

But this analysis fails to recognize that a rollover actually consists of at least three separate 

transactions – a distribution from the plan, a rollover to the IRA and the investment of the proceeds 

within the IRA (which itself may be a series of transactions). Each transaction involves a separate 

recommendation, each of which may independently constitute investment advice. Therefore, each

recommendation must be analyzed separately to determine whether the recommendation is “in 

exchange for a fee or other compensation” so as to constitute a fiduciary recommendation. This 

interpretation is more consistent with the other provisions of the proposed regulation and the language 

of ERISA Section 3(21)(A)(ii).

Misconception No. 7:

A recommendation to “stay in the plan,” without more,

would constitute fiduciary investment advice under the proposal.

Statements that do not refer to investments (or investment advisors or managers) cannot be 

investment advice as defined in the Department’s proposal, so a recommendation to a plan participant 

to stay in the plan without any recommendation as to the participant’s plan investments would not 

constitute fiduciary investment advice under the proposal.

Investment advice is defined under the proposal as 
A-6

“the following types of advice in exchange for a fee or other compensation, whether direct or 

indirect: (i) A recommendation as to the advisability of acquiring, holding, disposing or 

exchanging securities or other property, including a recommendation to take a distribution of 

benefits or a recommendation as to the investment of securities or other property to be rolled 

over or otherwise distributed from the plan or IRA, (ii) A recommendation as to the 

management of securities or other property, including recommendations as to the management 

of securities or other property to be rolled over or otherwise distributed from the plan or IRA, 

(iii) [an appraisal, fairness opinion or similar statement], and (iv) A recommendation of a 

person who is also going to receive a fee or other compensation for providing any of the types 

of advice described in paragraphs (i) through (iii), [which recommendations also meet certain 

other requirements].”

As formulated, “distributions” are included in the definition of investment advice as an example of 

advice about “acquiring, holding, disposing or exchanging securities of other property.” Presumably, 

this is true because taking a distribution necessarily involves disposing of the interest in the plan 

which, in most cases, requires the sale of the investments held in the plan.

A simple recommendation to “stay in the plan” is not included in any of the types of 

recommendations described in this advice definition, however. Looking solely at the wording of the 

definition, it covers only a “recommendation ... to take a distribution of benefits.” A recommendation 

to stay in plan is actually a recommendation not to take a distribution of benefits. More importantly, 

though, a recommendation to stay in plan does not constitute a recommendation with respect to the 

“advisability of acquiring, holding, disposing or exchanging securities or other property” held in the 

plan. The acquisition, holding, disposition or exchange of securities in connection with a participant 

staying in the plan would depend solely upon the participant’s separately taking or refraining to take a 

course of action with respect to his or her securities or other property, e.g., the participant must 

separately decide whether to hold, exchange, or sell his or her plan securities or other property. Since 

the advisor has not made a suggestion that the participant engage in or refrain from engaging in or 

refraining from taking a particular course of action with respect to the securities or other property, the 

advisor has not made a recommendation that constitutes investment advice within the meaning of the 

Department’s proposal. 

Similarly, Fidelity’s new paradigm does not create a rollover recommendation loophole. It 

simply recognizes that conversations that do not refer to investments cannot be investment advice 

under the Department’s proposal, even if those conversations may refer to rollovers.

Misconception No. 8:

The Department’s proposal is business model neutral.

Assuming the Department solves the “sales dilemma” described above, advisors that charge a 

fixed fee for advice are not subject to any new requirements under the proposal, including any 

requirement to act in the best interest of IRA owners. Advisors with commission-based and other 

variable fee arrangements, however, are subject to dozens of new requirements under the proposed 

BIC Exemption. The Proposed Regulation therefore clearly favors one business model over another.

It is clear that the rule would not create any new requirements for fixed-fee based advisors as a 

practical matter. Once engaged by an investor, any investment advice recommendations by an advisor 

that charges a fixed fee would not give rise to a prohibited transaction. Therefore, there would be no 
A-7

need for the advisor to satisfy any of the proposed BIC Exemption requirements, including the 

requirement to enter into a best interest contract with the investor. Without the best interest contract 

requirement, the advisor would not be subject to a best interest obligation under the rule with respect to 

any recommendations to IRA owners. And while the advisor would owe a plan sponsor or participant 

a best interest obligation under the rule, that obligation already exists under ERISA and thus would not 

be a new requirement under the proposed rule.

By imposing no new requirements on fixed-fee based advisors and dozens of burdensome new 

requirements on variable-fee advisors, the rule clearly incents advisors to choose a fixed-fee based 

model. In many cases, however, changing from a variable-fee based model to a fixed-fee based model 

will result in higher costs for investors. An example illustrates this point:

Example 3: Suppose an advisor receives compensation from the investments she recommends 

that varies between 25 and 40 basis points. Such an arrangement would give rise to a 

prohibited transaction under ERISA and the Code because the advisor’s recommendations 

would influence the amount of the advisor’s compensation. To avoid a prohibited transaction, 

the advisor could simply charge a flat fee of 40 basis points on total assets and then offset any 

compensation received from the investments against the fee. In that case, however, the investor 

would almost certainly pay more for the advice than if the compensation were permitted to 

vary. 

One way to level the playing field and remove the rule’s incentive to adopt higher cost fixed 

fee arrangements while still benefitting investors and protecting them from conflicts would be to 

clarify that, for purposes of the prohibited transaction rules under ERISA and the Code, a variable fee 

that is subject to a reasonable, disclosed and agreed upon cap would be treated the same as a nonvariable fixed fee, so long as the advisor’s recommendations are required to be made in the investor’s 

best interest. 

Example 4: The advisor and investor in the example above could agree in advance that the 

advisor would charge a fixed fee of 40 basis points and offset any compensation received from 

investments, but to the extent such investment compensation did not fully offset the 40 basis 

point fee, any shortfall would be waived. In other words, the advisor’s fee would be capped at 

40 basis points, but the investor would not actually pay 40 basis points, and the advisor would 

not necessarily receive the full 40 basis points. Although the amount of the fee waiver could 

vary depending on the investments made, the advisor would be required to make investment 

recommendations in the investor’s best interest, and, no matter what, the investor would always 

be as well or better off than if he were simply paying the fixed 40 basis point fee.

Because a fee cap could be adopted by most commission-based and other variable fee advisors, 

clarifying the rule to treat fixed-fee arrangements and fee-capped arrangements equally for purposes of 

the prohibited transaction rules would have the effect of leveling the playing field for all business 

models. In this way, the rule could be made truly business model neutral. 
B-1

Attachment B

New Best Interest Paradigm Language

§ 2510.3-21 Definition of “Fiduciary.”

(a) Investment advice. For purposes 

of section 3(21)(A)(ii) of the Employee 

Retirement Income Security Act of 1974 

(Act) and section 4975(e)(3)(B) of the 

Internal Revenue Code (Code), except as 

provided in paragraphs (b) or (c) of this 

section, a person renders investment advice 

with respect to moneys or other property of a 

plan or IRA described in paragraph (e)(2) or 

(3) of this section if –

(1) Such person provides, directly to a 

plan, plan fiduciary, plan participant or 

beneficiary, IRA, or IRA owner the 

following types of advice in exchange for 

a fee or other compensation, direct or 

indirect:

(i) A recommendation as to the 

advisability of acquiring, holding, 

disposing or exchanging securities or 

other property, including a 

recommendation to take a distribution 

of benefits or a recommendation as to 

the investment of securities or other 

property to be rolled over or otherwise 

distributed from the plan or IRA;

(ii) A recommendation as to the 

management of securities or other 

property, including recommendations as 

to the management of securities or other 

property to be rolled over or otherwise 

distributed from the plan or IRA;

(iii) A recommendation of a person

who is also going to receive a fee or 

other compensation for providing any 

of the types of advice described in 

paragraphs (a)(1)(i) or (ii) of this 

section.

(2) A person who is a fiduciary with 

respect to an employee benefit plan or 

IRA by reason of rendering investment 

advice (as defined in paragraph (a)(1) of 

this section) shall not be deemed to be a 

fiduciary with respect to:

(i) The terms and conditions of 

engagement of the person, including the 

scope of the obligation to provide 

advice, the products or services with 

respect to which advice is provided and 

the compensation payable to the person, 

provided the plan fiduciary, participant 

or beneficiary, or IRA owner has 

consented to the terms and conditions 

of the engagement after disclosure of all 

material aspects of such terms and 

conditions, including material conflicts 

of interest; or

(ii) Any assets of the plan or IRA with 

respect to which such person does not 

have any discretionary authority, 

discretionary control or discretionary 

responsibility, does not exercise any 

authority or control, does not render 

investment advice (as defined in 

paragraph (a)(1) of this section) for a 

fee or other compensation, and does not 

have any authority or responsibility to 

render such investment advice.

(3) Nothing in this paragraph shall be 

deemed to:

(i) Exempt such person from the 

provisions of section 405(a) of the Act 

concerning liability for fiduciary 

breaches by other fiduciaries with 

respect to any assets of the plan; or

(ii) Exclude such person from the 

definition of the term “party in interest” 

(as set forth in section 3(14)(B) of the 

Act or “disqualified person” as set forth 

in section 4975(e)(2) of the Code) with 

respect to a plan.

(b) Investment education. 

Notwithstanding paragraph (a) of this 

section, a person shall not be a fiduciary by 

reason of rendering investment advice (as 

defined in paragraph (a)(1) of this section) to 

the extent such person furnishes or makes 

available any of the following categories of 

investment related information and materials 

to a plan, plan fiduciary, participant or 

beneficiary, IRA or IRA owner, irrespective 

of who provides or makes available the 

information and materials (e.g., plan 

sponsor, fiduciary or service provider), the 

frequency with which the information and 

materials are provided, the form in which the 

information and materials are provided (e.g., 

on an individual or group basis, in writing or 

orally, or via call center, video or computer 

software), or whether an identified category 

of information and materials is furnished or 

made available alone or in combination with 

other categories of information and 

materials, provided that such person does not 

represent or acknowledge that he is acting as 

a fiduciary in furnishing or making available 

such information and materials. The 

foregoing is not affected by the fact that a 

plan or IRA offers only one investment 

alternative in a particular asset class 

identified in an asset allocation model.

(1) – (5) [Same as section (b)(6)(i) –

(v) of the Proposed Regulation, except 

omit “or a particular participant or 

beneficiary or IRA owner,” from section 

(b)(6)(i) and replace section (b)(6)(iii)(C) 

and (b)(6)(iv)(E) with the following: “To 

the extent that an asset allocation model 

identifies any specific investment 

alternative available under the plan or 

IRA, the model is accompanied by a 

statement indicating that other investment 

alternatives having similar risk and return 

characteristics may be available under the 

plan or IRA and identifying where 

information on those investment 

alternatives may be obtained; and”.]

(c) Execution of securities 

transactions. [Same as section (d) of the 

Proposed Regulation.]

(d) Internal Revenue Code. [Same as 

section (e) of the Proposed Regulation.] 

(e) Definitions. For purposes of this 

section—

(1) ‘‘Recommendation’’ means a 

communication that, based on its content, 

context, and presentation, would 

reasonably be relied upon as unbiased by 

the recipient in making investment or 

management decisions. 

(i) A communication shall be deemed 

to be a recommendation if made by a 

person who (A) represents or 

acknowledges himself to be making 

such communication as a fiduciary 

within the meaning of the Act, or (B) 

otherwise holds himself out in making 

such communication, either through a 

title or other identifying description, as 

performing an advisory function. 

(ii) Unless paragraph (e)(1)(i) of this 

section applies, a communication shall 

be deemed not to be a recommendation 

if accompanied by a statement that 

fairly informs the communication 

recipient of the existence and nature of 

the communicator’s financial interests 

in the transaction and that such 

communication is not intended to 

constitute impartial investment advice 

to the communication recipient.

(2) ‘‘Plan’’ means any employee 

benefit plan described in section 3(3) of 

the Act and any plan described in section 

4975(e)(1)(A) of the Code.
B-2

(3) ‘‘IRA’’ means any trust, account or 

annuity described in Code section 

4975(e)(1)(B) or (C).

(4) ‘‘Plan participant’’ means for a 

plan described in section 3(3) of the Act, a 

person described in section 3(7) of the 

Act.

(5) ‘‘IRA owner’’ means with respect 

to an IRA either the person who is the 

owner of the IRA or the person for whose 

benefit the IRA was established. 

(6) ‘‘Plan fiduciary’’ means a person 

described in section (3)(21) of the Act and 

4975(e)(3) of the Code. 

(7) ‘‘Fee or other compensation, 

direct or indirect’’ for purposes of this 

section and section 3(21)(A)(ii) of the Act, 

means any fee or compensation received 

by the person (or by an affiliate) from any 

source

(i) for a recommendation set forth in 

paragraph (a)(1), and 

(ii) incident to the specific transaction 

that is the subject of a 

recommendation.

The term fee or other compensation 

includes, for example, brokerage fees, 

mutual fund and insurance sales 

commissions. For purposes of this 

definition, a person may specify which 

transactions are excluded from the scope 

of its advice for purposes of determining 

whether a fee or other compensation is 

payable with respect to that advice.

(8) ‘‘Affiliate’’ includes any person 

directly or indirectly, through one or more 

intermediaries, controlling, controlled by, 

or under common control with such 

person; any officer, director, partner, 

employee or relative (as defined in section 

3(15) of the Act) of such person; and any 

corporation or partnership of which such 

person is an officer, director or partner.

(9) ‘‘Control’’ for purposes of 

paragraph (e)(8) of this section means the 

power to exercise a controlling influence 

over the management or policies of a 

person other than an individual.
B-3

Best Interest Contract Exemption:

Section I – Best Interest Contract 

Exemption. 

(a) In general. ERISA and the Internal 

Revenue Code prohibit fiduciary advisers to 

employee benefit plans (Plans) and 

individual retirement plans (IRAs) from 

receiving compensation that varies based on 

their investment recommendations. 

Similarly, fiduciary advisers are prohibited 

from receiving compensation from third 

parties in connection with their advice. This 

exemption permits certain persons who 

provide investment advice, and their 

associated financial institutions, affiliates 

and other related entities, to receive such 

otherwise prohibited compensation as 

described below.

(b) Covered transactions. This 

exemption permits Advisers, Financial 

Institutions, and their Affiliates and Related 

Entities to receive compensation for services 

provided in connection with investment 

advice within the meaning of ERISA section 

3(21)(A)(ii). The exemption provides relief 

from the restrictions of ERISA section 

406(a)(1)(D) and 406(b) and the sanctions 

imposed by Code section 4975(a) and (b), by 

reason of Code section 4975(c)(1)(D), (E) 

and (F). The Adviser and Financial 

Institution must comply with the conditions 

of Sections II–V to rely on this exemption.

(c) Exclusions. This exemption does 

not apply with respect to any transaction 

where the Adviser (1) exercises any 

discretionary authority or discretionary 

control respecting management of the Plan 

or IRA assets involved in the transaction or 

exercises any authority or control respecting 

management or disposition of the assets, or 

(2) has any discretionary authority or 

discretionary responsibility in the 

administration of the Plan or IRA.

Section II – Standards of Impartial 

Conduct.

If the fiduciary is a fiduciary within the 

meaning of ERISA section 3(21)(A)(i) or 

(ii), or Code section 4975(e)(3)(A) or (B), 

with respect to the assets of a plan or IRA 

involved in the transaction, the fiduciary 

must comply with the following conditions 

with respect to the transaction:

(a) The fiduciary is subject to a legally 

binding commitment to provide advice that 

is in the Best Interest of the plan or IRA.

(b) All compensation received by the 

fiduciary and its Affiliates in connection 

with the transaction is reasonable in relation 

to the total services the fiduciary and its 

Affiliates provide to the plan or IRA.

(c) The fiduciary's statements about 

recommended investments, fees, Material 

Conflicts of Interest, and any other matters 

relevant to a plan's or IRA owner's 

investment decisions, are not misleading.

For purposes of Section II(a), the legally 

binding commitment shall not contain (1) 

exculpatory provisions disclaiming or 

otherwise limiting liability of the Adviser or 

Financial Institution for a violation of the 

commitment’s terms, or (2) a provision 

under which the Plan, IRA or advice 

recipient waives or qualifies its right to bring 

or participate in a class action or other 

representative action in court in a dispute 

with the Adviser or Financial Institution.

Section III – Disclosure Requirements.

(a) The Financial Institution shall 

disclose at or before the time a 

recommendation is made 

(1) the scope of the Financial 

Institution’s services and its potential 

conflicts of interest applicable to the 

recommendation, including that it may 

receive different compensation based on 

the recommended investments, if 

applicable, and 

(2) a website address where the advice 

recipient may obtain specific information 

about the cost to the Plan, participant or 

beneficiary, or IRA owner and 

compensation to the Financial Institution 

associated with the products and services 

recommended to the advice recipient. 

Information available on the website shall 

be updated no less frequently than 

quarterly and shall be presented in a 

format that will allow the advice recipient 

to make comparisons of such cost and 

compensation with respect to all other 

products and services available through 

the Adviser and Financial Institution 

sharing the same characteristics as the 

products and services recommended to the 

advice recipient, including without 

limitation by making available a schedule 

of fees and other compensation with 

respect to all products and services 

sharing the same characteristics as a 

recommended product or service. 

Information available on the website with 

respect to specific investment 

recommendations shall be provided to the 

advice recipient in paper format upon 

request.

(b) If applicable with respect to any 

recommendation, the Financial Institution 

shall notify the advice recipient at the time 

of such recommendation that such 

recommendation is not sufficiently broad to 

meet the advice recipient’s needs. The 

foregoing shall not apply with respect to 

recommendations to participants in ERISAcovered participant directed individual 

account Plans in which the menu of 

investment options is selected by an 

Independent Plan fiduciary, provided the 

Adviser and Financial Institution have not 

provided investment advice to such 

Independent Plan fiduciary with respect to 

such menu.

Section IV —Exemption for Pre-Existing 

Transactions

(a) In general. ERISA and the Internal 

Revenue Code prohibit Advisers, Financial 

Institutions and their Affiliates and Related 

entities from receiving variable or third-party 

compensation as a result of the Adviser’s 

and Financial Institution’s advice to a Plan, 

participant or beneficiary, or IRA owner. 

Some Advisers and Financial Institutions did 

not consider themselves fiduciaries within 

the meaning of 29 CFR 2510– 3.21 before 

the applicability date of the amendment to 29 

CFR 2510–3.21 (the Applicability Date). 

Other Advisers and Financial Institutions 

entered into transactions involving Plans, 

participant or beneficiary accounts, or IRAs 

before the Applicability Date, in accordance 

with the terms of a prohibited transaction 

exemption that has since been amended. This 

exemption permits Advisers, Financial 

Institutions, and their Affiliates and Related 

Entities, to receive compensation, such as 

12b–1 fees, in connection with the purchase, 

sale or holding of a security or other 

property by a Plan, participant or beneficiary 

account, or an IRA, as a result of the 

Adviser’s and Financial Institution’s advice, 

that occurred prior to the Applicability Date, 

as described and limited below.

(b) Covered transaction. Subject to 

the applicable conditions described below, 

the restrictions of ERISA section 

406(a)(1)(D) and 406(b) and the sanctions 

imposed by Code section 4975(a) and (b) by 

reason of Code section 4975(c)(1)(D), (E) 

and (F) shall not apply to the receipt of 

compensation by an Adviser, Financial 

Institution, and any Affiliate and Related 

Entity, for services provided in connection 

with the purchase, holding or sale of a 

security or other property, as a result of the 

Adviser’s and Financial Institution’s advice, 

that was purchased, sold, or held by a Plan, 

participant or beneficiary account, or an IRA 

before the Applicability Date if:

(1) The compensation is not excluded 

pursuant to Section I(c) of the Best 

Interest Contract Exemption; 
B-4

(2) The compensation is received 

pursuant to an agreement, arrangement or 

understanding that was entered into prior 

to the Applicability Date; and

(3) The purchase or sale of the 

security or other property was not a nonexempt prohibited transaction pursuant to 

ERISA section 406 and Code section 4975 

on the date it occurred.

Section V—Definitions

For purposes of these exemptions, terms 

shall have the meanings set forth in [the 

Regulation], unless otherwise defined below: 

(a) ‘‘Adviser’’ means an individual 

who:

(1) Is a fiduciary of a Plan or IRA 

solely by reason of the provision of 

investment advice described in ERISA 

section 3(21)(A)(ii) or Code section 

4975(e)(3)(B), or both, and the applicable 

regulations, with respect to the securities 

or other property involved in the 

transaction;

(2) Is an employee, independent 

contractor, agent, or registered 

representative of a Financial Institution; 

and

(3) Satisfies the applicable federal and 

state regulatory and licensing 

requirements of insurance, banking, and 

securities laws with respect to the covered 

transaction. 

(b) ‘‘Affiliate’’ of an Adviser or 

Financial Institution means—

(1) Any person directly or indirectly 

through one or more intermediaries, 

controlling, controlled by, or under 

common control with the Adviser or 

Financial Institution. For this purpose, 

‘‘control’’ means the power to exercise a 

controlling influence over the 

management or policies of a person other 

than an individual; 

(2) Any officer, director, employee, 

agent, registered representative, relative 

(as defined in ERISA section 3(15)), 

member of family (as defined in Code 

section 4975(e)(6)) of, or partner in, the 

Adviser or Financial Institution; and 

(3) Any corporation or partnership of 

which the Adviser or Financial Institution 

is an officer, director or employee or in 

which the Adviser or Financial Institution 

is a partner. 

(c) Investment advice is in the ‘‘Best 

Interest’’ of the advice recipient when the 

Adviser and Financial Institution providing 

the advice act with the care, skill, prudence, 

and diligence under the circumstances then 

prevailing that a prudent person would 

exercise based on the investment objectives, 

risk tolerance, financial circumstances, and 

needs of the advice recipient, without regard 

to the financial or other interests of the 

Adviser, Financial Institution or any 

Affiliate, Related Entity, or other party. 

(d) ‘‘Financial Institution’’ means the 

entity that employs the Adviser or otherwise 

retains such individual as an independent 

contractor, agent or registered representative 

and that is: 

(1) Registered as an investment 

adviser under the Investment Advisers Act 

of 1940 (15 U.S.C. 80b–1 et seq.) or under 

the laws of the state in which the adviser 

maintains its principal office and place of 

business; 

(2) A bank or similar financial 

institution supervised by the United States 

or state, or a savings association (as 

defined in section 3(b)(1) of the Federal 

Deposit Insurance Act (12 U.S.C. 

1813(b)(1)), but only if the advice 

resulting in the compensation is provided 

through a trust department of the bank or 

similar financial institution or savings 

association which is subject to periodic 

examination and review by federal or state 

banking authorities; 

(3) An insurance company qualified to 

do business under the laws of a state, 

provided that such insurance company: 

(A) Has obtained a Certificate of 

Authority from the insurance 

commissioner of its domiciliary state 

which has neither been revoked nor 

suspended, 

(B) Has undergone and shall continue 

to undergo an examination by an 

Independent certified public accountant 

for its last completed taxable year or 

has undergone a financial examination 

(within the meaning of the law of its 

domiciliary state) by the state’s 

insurance commissioner within the 

preceding 5 years, and 

(C) Is domiciled in a state whose law 

requires that actuarial review of 

reserves be conducted annually by an 

Independent firm of actuaries and 

reported to the appropriate regulatory 

authority; or 

(4) A broker or dealer registered under 

the Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.). 

(e) ‘‘Independent’’ means a person that: 

(1) Is not the Adviser, the Financial 

Institution or any Affiliate relying on the 

exemption, 

(2) Does not receive compensation or 

other consideration for his or her own 

account from the Adviser, the Financial 

Institution or Affiliate; and 

(3) Does not have a relationship to or 

an interest in the Adviser, the Financial 

Institution or Affiliate that might affect 

the exercise of the person’s best judgment 

in connection with transactions described 

in this exemption. 

(f) A ‘‘Material Conflict of Interest’’ 

exists when an Adviser or Financial 

Institution has a financial interest that could 

affect the exercise of its best judgment as a 

fiduciary in rendering investment advice. 

(g) ‘‘Related Entity’’ means any entity 

other than an Affiliate in which the Adviser 

or Financial Institution has an interest which 

may affect the exercise of its best judgment 

as a fiduciary.